|Name||Reco Date||Reco price||Target||Prospero Rating||Report Date*|
(Post Spilt Price – Rs. 16)
|Rs. 150 – Rs. 180||7 / 10||27Mar2014|
A) Company background:
Setco Auto is India’s leading manufacturer of clutch plates and cover assembly, having a sizable presence in OEM as well as aftermarket segment.
Setco’s LIPE brand has a strong recall as well as wide acceptance among the OEMs as well as the aftermarkets. Its only competition in India is from Exide Industries and Valeo. Setco is the 5th largest clutch manufacturer globally and the largest player in India.
B) Investments arguments:
Leadership in OEM segment: Setco has a 75% market share in the OEM markets and contributes to 80%, 100% and 65% of the overall clutch requirements of Tata Motors, Eicher Motors and Ashok Leyland respectively. The OEM segment has a strong correlation to the demand for new CVs. The sharp 35% and 28% decline in CV off-take in FY13 & FY14 has resulted in revenues de-growth from this segment. Economic recovery could result in sharp reversal in the trend.
Strong presence in aftermarkets: Setco distributes its clutches through the service network of Tata Motors, Ashok Leyland and Eicher Motors. Clutch needs a replacement after every 200,000kms or once in three years. There are more than 2 million M&HCVs in the country and the demand from this segment is not cyclical in nature. However, there is competition from un-branded players. Setco has 35% market share in the aftermarket.
Low capacity utilization leaves scope for operating leverage: Setco operates at 60% utilization levels, indicating huge scope for operating leverage when the growth revives. Capex requirements over the next three years would be relatively modest at INR25cr per year and would be restricted to maintenance, up gradation and new product related capex. Economic revival can result in huge operating leverage.
Attractive valuations: Setco being the leader in M&HCV segment will be the key beneficiary of the revival in CV cycle over the next two years. EPS and RoCEs seem to have bottomed out at INR9/share and 9% respectively for FY14. We envisage a multi-year improvement in both going ahead and FY16 EPS could very well exceed INR15. At the current price of INR90/share, the stock trades at 6x EV / EBITDA on FY16e basis.
*Report Date may sometimes be different from Recommended Date.